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October 14, 2007

PCAOB charts standard-setting priorities

By Nicholas Moody

PCAOB charts standard-setting priorities

Risk assessment will be one of the key standard setting priorities for the US Public Company Accounting Oversight Board (PCAOB) over the next year.

The PCAOB’s chief auditor, Thomas Ray, presented the US watchdog’s nine main priorities to its Standing Advisory Group (SAG) last month. SAG advises the board on the establishment of auditing and related professional practice standards. The group is made up of 31 highly qualified advisers representing the auditing profession, public companies, investors and other individuals with a public interest in the financial reporting environment.

There are a number of auditing standards that are encompassed within the risk assessment project, Ray told TA. “There is one dealing with audit risk which involves the auditor performing procedures to assess the risk of misstatement for the various areas of the financial statements. Then there are performing procedures to respond to those assessed risks, how the auditor applies materiality in the context of a financial statement audit and then standards related to audit evidence,” he said, adding that the project has received a high priority because feedback from the SAG suggested that auditors are not doing the greatest job in risk assessment and responding to those risks.   “The auditor has specific responsibilities to assess the risk that management may be fraudulently manipulating the financial statements and we’ve seen evidence on our inspections that auditors may not be applying that standard as well as they should be,” Ray said.

The chief auditor suggested that if the PCAOB is able to integrate the fraud responsibility more fully into the overall auditors risk assessment responsibility it may be able to improve performance in that area. Ray expects the PCAOB to develop proposals on risk assessment during the next year.

Internal control will remain on the PCAOB’s radar, although not as a specific standards-setting priority.

Engagement quality review and fair value were two other important standard-setting priorities. “The Sarbanes-Oxley Act requires that we adopt into our standards and auditing standard what it calls a second or a concurring partner review. We refer to it as engagement quality review because we think it is more descriptive of what we do and it is also similar to what the International Auditing and Assurance Standards Board calls it,” Ray told TA. He anticipates a proposal on engagement quality review will be made within the next few months, possibly before the end of the year.

The recent subprime lending controversy and global market illiquidity has continued to focus the PCAOB’s monitoring of fair value measurements and disclosures. Ray added: “We certainly will be spending efforts to evaluate whether additional guidance is needed [for fair value measurements] or whether we do need to hurry up and do something in the standards setting area to address potential auditing issues.”

He acknowledged that fair value is a difficult area for auditors. “Auditors tend to not have a tremendous amount of experience in dealing with auditing fair values particularly of a lot of the more complex financial instruments,” Ray said.

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